Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Masonite International's (NYSE:DOOR) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Masonite International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$271m ÷ (US$2.2b - US$369m) (Based on the trailing twelve months to April 2021).
Therefore, Masonite International has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Building industry.
In the above chart we have measured Masonite International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Masonite International here for free.
The Trend Of ROCE
Masonite International is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. The amount of capital employed has increased too, by 41%. So we're very much inspired by what we're seeing at Masonite International thanks to its ability to profitably reinvest capital.
Our Take On Masonite International's ROCE
All in all, it's terrific to see that Masonite International is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 69% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a separate note, we've found 3 warning signs for Masonite International you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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What are the risks and opportunities for Masonite International?
Trading at 48.8% below our estimate of its fair value
Earnings are forecast to grow 4.54% per year
Debt is not well covered by operating cash flow
Significant insider selling over the past 3 months
Large one-off items impacting financial results
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Masonite International Corporation designs, manufactures, markets, and distributes interior and exterior doors for the new construction and repair, renovation, and remodeling sectors of the residential and non-residential building construction markets worldwide.
Undervalued with mediocre balance sheet.